Concept explainers
Short term notes payable:
Short term notes payable are the short term financing instruments used in business. It’s a short term liability for business.
Given,
L note issued on April 20, 2016 amounting $40,250 for 30 days.
N note issued on July 8, 2016 amounting to $80,000 for 120 days at 9%.
F note issued on November 28, 2016 amounting to $42,000 for 60 day at 8%.
1.
To calculate: The date of maturity of notes
Explanation of Solution
Date of maturity of notes
S. No. | Notes | Issue date | Term | Maturity Date |
1 | L | May 19, 2016 | 90 days | August 19,2016 |
2 | N | July 8, 2016 | 120 days | November 8, 2016 |
3 | F | November 28, 2016 | 60 days | January 28, 2017 |
Table (1)
Thus, Maturity date for note L is August 19, 2016 N is November 8, 2016 and F is January 28, 2017
2.
To calculate: Interest due at maturity
2.
Explanation of Solution
Formula to calculate interest due at maturity,
For L
Substitute $35,000 for principal, .10 for interest rate and 90 days for term of note.
For N
Substitute $80,000 for principal, .09 for interest rate and 120 days for term of note.
For F
Substitute $42,000 for principal, .08 for interest rate and 60 days for term of note.
Thus, interest due at maturity of L is $875, N is $2,400 and F is $560.
3.
To calculate: Interest expense to be recorded in the
3.
Explanation of Solution
Formula to calculate interest expense (to be recorded in the adjusting entry at the end of 2016),
For F
Substitute $42,000 for principal, .08 for interest rate and 33 days for number of days in 2016.
Thus , $308 is the interest expense to be recorded in the adjusting entry at the end of 2016
Working note:
Calculation of number of days of Note F in 2016,
4.
To calculate: Interest expense to be recorded in 2017.
4.
Explanation of Solution
Formula to calculate interest expense (to be recorded in 2017),
For F
Substitute $42,000 for principal, 0.08 for interest rate and 27 days for number of days in 2016.
Working note:
Calculation of number of days of Note F in 2017,
5.
To prepare:
5.
Explanation of Solution
Journal entry for all transactions
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
April 20,2016 | Inventory | 40,250 | ||
Account Payable - L | 40,250 | |||
(To record purchase of inventory) |
Table (1)
- Inventory is an asset account. Since company has received inventory, balance of inventory has increased. Hence it is debited.
- Account Payable is a liability account. Since it is increasing, this account is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
May 19,2016 | Account Payable - L | 40,250 | ||
Notes Payable | 35,000 | |||
Cash | 5,250 | |||
(To record issuance of notes against loan of L) |
Table (2)
- Account Payable - L is a liability account. Since it is decreasing, this account is debited.
- Notes Payable is a liability account. Company is issuing note, so balance of note is increasing, hence credit this account.
- Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
July 8,2016 | Cash | 80,000 | ||
Notes Payable - N | 80,000 | |||
(To record notes payable from N Bank) |
Table (3)
- Cash is an asset account. Since company has received cash, balance of cash has increased. Hence it is debited.
- Note Payable is a liability account. Since it is increasing, this account is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
August 19,2016 | Notes Payable | 35,000 | ||
Interest expenses | 875 | |||
Cash | 35,875 | |||
(To record notes paid with interest) |
Table (4)
- Notes payable is a liability account. Since it is decreasing, this account is debited.
- Interest expenses is an expense account. Since company is paying this expenses, it is debited.
- Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
November 8,2016 | Notes Payable | 80,000 | ||
Interest expenses | 2,400 | |||
Cash | 82,400 | |||
(To record notes paid with interest) |
Table (5)
- Notes payable is a liability account. Since it is decreasing, this account is debited.
- Interest expenses are an expense account. Since company is paying this expense, it is debited.
- Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
November 28,2016 | Cash | 42,000 | ||
Notes Payable - F | 42,000 | |||
(To record notes payable from F Bank) |
Table (6)
- Cash is an asset account. Since company has received cash, balance of cash has increased. Hence it is debited.
- Note Payable is a liability account. Since it is increasing, this account is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
December 31,2016 | Interest expenses | 308 | ||
Interest Payable | 308 | |||
(To record notes payable from F Bank) |
Table (7)
- Interest expense is an expense account. Since its balance is increasing, it is to be debited.
- Interest payable is a liability account. Since it is increasing, this account is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
January 28,2017 | Notes payable | 42,000 | ||
Interest payable | 308 | |||
Interest expenses | 252 | |||
Cash | 42,560 | |||
(To record notes paid with interest) |
Table (8)
- Notes payable is a liability account. Since it is decreasing, this account is debited.
- Interest Payable is a liability account. Since company is paying this liability, it is debited.
- Interest expenses are an expense account. Since company is paying this expense, it is debited.
- Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.
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Chapter 9 Solutions
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